Excess returns in Public-Private Partnerships: Do governments pay too much?. Economic Modelling, Volume 102, 105586.
We study the optimal design of Public-Private Partnerships (PPPs) when there is unobservable action on the private party’s side. We show that if the private party does not have negotiating power over the project’s surplus, then no inefficient delays are attributable to the moral hazard issue. However, if the private party has negotiating power, then the first-best timing is not guaranteed. The time discrepancy is shown to be costly in terms of overall project efficiency. The explicit consideration of the private party’s negotiating power can explain empirical evidence that private parties in PPPs tend to reap excess returns. These results are discussed in light of the COVID-19 pandemic and its implications for PPPs.